Question

Your investment banking firm has estimated what your new issue of bonds is likely to sell for under several different economic conditions. What is the expected​ (average) selling price of each​bond? Recession Steady Boom Probability .35 .55 .10 Bond price​$970 ​$1,000 ​$1,150 A. ​$1,007.50 B. ​$1,000.00 C. ​$1,100.33 D.​$1,004.50

Answer 1

D.​$1,004.50

Step-by-step explanation:

The expected selling price is defined by the weighted average of each possible outcome (recession, steady or boom) multiplied by their respective selling price

The outcomes likelihoods and prices are:

`\begin{array}{ccc}Recession&0.25&\$970\\Steady&0.55&\$1,000\\Boom&0.10&\$1,150\end{array}`

The expected selling price is:

`EP = (0.35 *\$970) + (0.55*\$1,000)+(0.1*\$1,150)\\EP = \$1,004.50`